A lesson in basic tax policy

You see people making this mistake a lot.  Otherwise smart, successful people think that if they make just one more dollar, their tax burden will suddenly shoot up.

This is not, nor has it ever been, how our tax system works.  Here are the current tax brackets:

Marginal Tax Rate[6] Single Married Filing Jointly or Qualified Widow(er) Married Filing Separately Head of Household
10% $0 to $8,700 $0 to $17,400 $0 to $8,700 $0 – $12,400
15% $8,700 to $35,350 $17,400 to $70,700 $8,700 to $35,350 $12,400 – $47,350
25% $35,350 to $85,650 $70,700 to $142,700 $35,350 to $71,350 $47,350 – $122,300
28% $85,650 to $178,650 $142,700 to $217,450 $71,350 to $108,725 $122,300 – $198,050
33% $178,650 to $388,350 $217,450 to $388,350 $108,725 to $194,175 $198,050 – $388,350
35% $388,350+ $388,350+ $194,175 $388,350+

We’ll do a simple example of a single person.  If you make less than $8,700, you are paying 10% in taxes.  So if you made $5,000 last year, you paid $500 in taxes.  Your effective income tax will always be 10% if you only make $8,700.

Say you made $20,000, though.  What would your taxes be?  Well, that puts you in the 15% tax bracket, but you won’t be paying 15% total.  You will be paying 10% on the first $8,700 and 15% on the next $11,300.  That is $870 and $1,695 for each respective bracket for a total of $2,565 tax burden.  That makes your effective tax rate 12.8%.  Which is about what Mitt Romney pays despite the fact that he makes millions more per year than you.

So, no, if you’re making $390,000 a year instead of $388,000 a year, you’re not going to suddenly own the government a whole lot more money.  And no, there is absolutely no reason to decide to take a vacation just because you are going to advance a tax bracket.

There you have it.  The progressive tax system!  It’s the only tax system that is fair if your definition of fair is making sure your fellow citizens can do things like eat and sleep in a bed.  It’s not so fair if your definition of fair is my money is mine and I got mine jack!